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The rush to the exits of the federal TARP bank bailout program by several Triad community banks through U.S. Treasury auctions could prompt more aggressive lending or mergers, according to banking experts.

But even the Special Inspector General that acts as a watchdog on the TARP program says it’s not yet clear how the relatively quick transfer of TARP obligations from government to private hands will play out for business borrowers and other customers.

The Treasury Department has now auctioned off the preferred shares it held in High Point-based Bank of North Carolina (NASDAQ: BNCN), Yadkin Valley Bank & Trust (NASDAQ: YAVY) in Elkin and Bank of Oak Ridge (NASDAQ: BKOR). Others, including NewBridge Bank (NASDAQ: NBBC) in Greensboro, have expressed interest in taking part in upcoming Treasury auctions.

The federal government is using the auctions to wind down the TARP capital program by transferring the shares it bought in banks nationwide at the height of the financial crisis to private investors’ hands. The government is selling those shares at various levels of discount, but is making the move in order to end government intervention in the market as soon as possible, officials have said.

Because of those discounts, taxpayers are getting back a little less than they put into some banks, but the banks themselves aren’t escaping the obligations that came with the TARP infusions, said Tony Plath, a banking professor with UNC-Charlotte. It’s just that those obligations are now owed to the private investors who bought the shares at auction rather than the government.

Rising dividend an impetus

The most important and ominous of those obligations is the dividend payment owed on the preferred shares, which stands at a relatively affordable 5 percent for now but will jump to 9 percent in late 2013 or early 2014 for most current and former TARP participants. Those whose shares have sold at auction will owe those payments to the new shareholders, Plath said.

Those dividend payments come straight off the bottom line, so banks will be eager to buy back those shares before that happens. Plath said that eagerness could translate into various strategies between now and then.

Some banks may simply try to earn enough money to be able to buy back the shares without depleting the capital levels that regulators watch so carefully as a sign of bank health. That would mean lending more aggressively or opening new lines of fee-based businesses, both of which could mean more competition that would benefit customers.

Tough road for community banks

But it’s still a long way from a booming lending market out there, and Plath said that will be a tough road for most community banks.

“They can take that greater risk, but regulators will take a close look at that,” he said. “I think banks that try to do that will realize they can’t earn their way out of the TARP shares, which will make them sitting ducks for the dividend reset.”

That’s what could lead to more community bank consolidation during the next year or so, Plath said, since a merger or acquisition may allow for the retirement of outstanding preferred shares that a bank couldn’t afford to redeem on its own.

Many of the private equity groups that are investing in TARP shares may be counting on that as an exit strategy, with returns that would be boosted by the discount they paid at auction.

“What it does is make those banks with TARP (shares) owned by private equity more willing to go into a merger (to avoid paying higher dividends), and it gives the group that owns the shares a way to flip them for a quick profit,” Plath said.

Urgency varies by bank

W. Swope Montgomery, CEO of BNC Bancorp (NASDAQ: BNCN), the parent company of Bank of North Carolina, said either of those scenarios could play out for some banks, though neither would make sense for his own bank since it has had no problem raising new capital on its own. It closed on a $72.5 million private equity round this summer led by its existing largest shareholder, Aquiline Capital Partners, which also bought a portion of BNC’s TARP shares at auction in August.

For Bank of N.C., having its TARP shares auctioned off hasn’t impacted its growth strategy, which has involved buying up smaller banks in markets in Charlotte, the Triangle and South Carolina. Aquiline already had board representation and likes that strategy, Montgomery said.

The market is trading shares of BNC Bancorp’s common stock at a price below their book value, Montgomery noted, which means it would be hard to go out and raise more capital that would be cheaper than the 5 percent dividend on the TARP shares. But 9 percent would be less attractive, though he said that’s still not an imminent worry.

“We can pay it off at any time if we come up with a different capital option, be it a common equity raise or something less expensive than 9 percent,” he said.

Unintended consequences

While banks will take different approaches once they’re out of TARP, the Special Inspector General keeping an eye on the program recently warned Congress that there is some peril in government’s strategy of getting out of its remaining investments quickly.

In its quarterly report to Congress issued Oct. 25, the agency said extra pressure for consolidation among community banks could end up having a negative effect on the regions they serve, since community banks are so closely tied to small businesses.

“Treasury should not rush to exit these banks from TARP, especially at a loss, without assessing … whether the exit meets (the program’s) goals to promote financial stability, maintain confidence, and enable lending,” the report said.